It’s personal ‘- What is compound interest?

SAN ANTONIO – You may have heard of compound interest investments, whether it’s compounding daily, monthly, quarterly, or semi-annually. But what exactly does it mean when you have compound interest?

The Consumer Financial Protection Bureau has stated that compound interest is when you earn interest on both the money you’ve invested and the interest you’ve earned.

Let’s say your investment, also known as principal, is $ 5,000 and it pays an interest rate of 2% with annual compounding for a total of 10 years. For the first year, you would have your investment of $ 5,000 plus the 2% you earned in interest. That’s a total of $ 5,100.

After the first year, compounding kicks in. Your investment will start earning interest on the interest you have already accrued.

So in year two, your investment is now worth $ 5,100 and earning you $ 102 in interest. That’s $ 2 earned on your $ 100 interest for the first year.

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Although it might not seem like much, after 10 years and due to funding your investment would reach $ 7,429.74.

Your investment continues to add up year after year, giving you even more money.

But remember that most investments come with risk, so you need to take this into account when deciding to use your money.

The Securities and Exchange Commission has a tool that helps you calculate compound interest. Click here to access the SEC compound calculator.

“Money: It’s Personal” is a series on KSAT’s News at 9 that details topics related to personal finance. If you have a suggestion or question on the types of topics you would like us to explain, click here.